Three Steps to Weave Equity Compensation into Your Financial Plan

Dealing with the ins and outs of equity compensation can seem daunting, but being proactive, focusing on goals and planning can make it all more manageable.

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Stress about finances transcends income level, financial acumen and experience, and today’s economic climate is presenting challenges even for seasoned company leaders. In fact, Morgan Stanley at Work research shows that 83% of executives who receive equity compensation say financial stress is negatively impacting their work and personal lives.

If you’re in that boat, factors like long vesting schedules, complicated tools or a confusing website can make equity compensation easy to overlook or frustrating to try to weave into your financial plans. While many used to see equity compensation as just a nice bonus, it’s especially worthwhile amid today’s uncertainty to view equity more holistically.

Equity compensation is a key part of your overall earnings, yet even financial professionals sometimes struggle with these complex instruments. Let’s break down a path that can help you better incorporate equity from your employer into your overall financial path.

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1. Stay proactive.

Take the time to look under the hood of your equity compensation plan each time you review your income, assets and debts. Earmark any equity events coming up in the next the year, such as stock options or RSUs (restricted stock units) that will vest, upcoming employee stock purchase program (ESPP) purchases or stock options set to expire.

It's also a good idea to check in on the potential value of your holdings, which is usually based on the current market price multiplied by the amount of share units you are awarded, minus any exercise costs. There may also be commissions and fees due, as well as tax implications — which are always a factor no matter when or how you use your equity compensation. Calculating tax implications can be complicated — for example, stock options, RSUs and ESPPs are taxed differently at conversion (RSUs), exercise (stock options) or sale (all types of holdings). The amount of time you own your share units also affects your tax treatment. A tax adviser can help.

Every company’s plan is different, and equity compensation can be complex, so make sure you have the details you need to make informed decisions. Beyond reviewing your plan details and exploring the digital platform on which your equity is administered, reach out to your employer with questions — they likely offer tailored content to help deliver answers, as well as on-call direct support from equity professionals who can provide personalized guidance.

2. Goals guide the way.

Our State of the Workplace Study 2023 has found that people now see achieving long-term goals as the most important benefit of equity compensation.2 But what are your goals, and how do you actually get there? There is no one right answer, whether it’s kicking off a new business venture, supporting a cause you love, paying down debt or buying a home. Whatever the case, your financial plan should adapt depending on your goals. Be honest with yourself about what you want to be working toward and how your equity awards may be able to help you get there.

As you’re accruing company equity, consider your personal level of risk tolerance overall, your time horizon, how liquid you need your investments to be and how large a percentage of your portfolio is made up of your company stock. Depending on your needs, you may want to diversify your investments to balance out risk and reward, particularly if your equity compensation becomes a larger part of your overall financial picture.

The bottom line: Be intentional. Defining a strategy for yourself that includes workplace equity awards can be an essential step in building up your personal wealth and reaching financial goals. You may benefit from working with a financial professional who can help you navigate contractual obligations and rules regarding your equity stake, as well as how to effectively tailor your overall investments toward your goals.

3. Plan for everything.

Consistency is key. Sometimes we aren’t planning or executing our financial strategy as well as we could simply because we are short on time, and equity can start to feel like a double-edged sword: With increased wealth potential comes new obligations and red tape. If you are not a financial professional fluent in tax code, consider seeking out professional assistance.

A financial adviser can offer insights around your specific financial situation and help you pull in the right specialists, from insurance to tax and estate attorneys. Connect with your company to find out if you can access workplace financial advisers and equity professionals who really understand the ins and outs of your unique plan and can help you find the right information and resources at the right time. Your equity plan provider and employer may also offer customizable solutions to help you make decisions amid the landscape of insider trading regulations and reporting requirements.

Whatever the market conditions or the hurdles you encounter in navigating your equity compensation, don’t leave this powerful benefit on autopilot. Remain mindful of your equity stake with each financial decision you make to take a more active role in owning how your company stake works for you.

This material has been prepared for informational and educational purposes only. It does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Morgan Stanley Smith Barney LLC (“Morgan Stanley”) recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Morgan Stanley Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

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Krystal Barker Buissereth, CFA®
Head of Financial Wellness, Morgan Stanley

Krystal Barker Buissereth, CFA®, is a Managing Director and the Head of Financial Wellness for Morgan Stanley at Work. In this role, she is responsible for working with corporate clients and organizations on creating, implementing and managing financial wellness programs that meet the needs of their employees.